Category Archives: Economy

Housing Bubble Trouble: Ohio judge places another straw on top of subprime camel…

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“A US Federal Judge, C.A. Boyko in Federal District Court in Cleveland Ohio ruled to dismiss a claim by Deutsche Bank National Trust Company. DB’s US subsidiary was seeking to take possession of 14 homes from Cleveland residents living in them, in order to claim the assets.

Here comes the hair in the soup. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta of not longer.

Again why could Deutsche Bank not show the 14 mortgages on the 14 homes? Because they live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

Indeed the profits being earned in the past seven years by the world’s largest financial players from Goldman Sachs to Morgan Stanley to HSBC, Chase, and yes, Deutsche Bank, were so staggering, few bothered to open the risk models used by the professionals who bundled the mortgages. Certainly not the Big Three rating companies who had a criminal conflict of interest in giving top debt ratings. That changed abruptly last August and since then the major banks have issued one after another report of disastrous “sub-prime” losses.

A new unexpected factor

The Ohio ruling that dismissed DB’s claim to foreclose and take back the 14 homes for non-payment, is far more than bad luck for the bank of Josef Ackermann. It is an earth-shaking precedent for all banks holding what they had thought were collateral in form of real estate property.

How this? Because of the complex structure of asset-backed securities and the widely dispersed ownership of mortgage securities (not actual mortgages but the securities based on same) no one is yet able to identify who precisely holds the physical mortgage document. Oops! A tiny legal detail our Wall Street Rocket Scientist derivatives experts ignored when they were bundling and issuing hundreds of billions of dollars worth of CMOs in the past six or seven years. As of January 2007 some $6.5 trillion of securitized mortgage debt was outstanding in the United States…….”

More by Bill Engdahl on the financial tsunami ahead.

Econ-job: Airbus hit by dollar storm

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Cavuto on FOX, this Saturday morning, had a couple of predictions for the coming months:

For the credit market: more rate cutting from the Fed

For the housing market: it’s the beginning of McMansions……to McNuggets.

What about the exchange rate? The dollar slalom’s put even Airbus in a tizzy:-

“The dollar has hit new record lows against the euro this week, something which Airbus says favours its US rival Boeing.

Earlier this month Airbus warned it may have to deepen its planned restructuring after steeper than expected third-quarter losses.

It said a net loss of 776m euros ($1.14 bn; £541m) – as against a loss of 189m euros in 2006 – was down to delays with its A400M military transport aircraft.

And it said full-year earnings would only “roughly break even”.”

More at the BBC.

But on Cavuto, the prediction for 2008 for the buck is — an enormous reversal. Pop goes the euro! Here’s hoping.

Econ-job: Enter the Bear…..

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“Note that the S&P and the Wilshire have NOT confirmed the Dow. In one of the strangest situations I’ve ever dealt with, neither the S&P 500 or the Wilshire 5000 have confirmed the Dow in that neither the S&P nor the Wilshire have violated their August 16 lows. What is the meaning of this absolutely weird situation? I don’t know — honestly I really don’t know. But it is certainly something to think about.

Does the superior action of the S&P and the Wilshire cast doubt on the Dow Theory bear signal? I don’t know. I’ve never in fifty years of watching market action seen this type of situation.

“There isn’t a lot more that I can say that is worth saying. The market has told its story. The scene has changed. I’ve lived through these changes before, and so have my subscribers. A few of my subscribers have been with me for almost 50 years. We’ve survived and done pretty well over those 50 years. We will continue to survive, regardless of the mildness or ferocity of this bear market….”

Richard Russell on how Dow Theory confirms that we have begun a bear market

Jiddu Krishnamurthi: be first-hand, not second-hand

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“For centuries we have been spoon-fed by our teachers, by our authorities, by our books, our saints. We say, ‘Tell me all about it—what lies beyond the hills and the mountains and the earth?’ and we are satisfied with their descriptions, which means that we live on words and our life is shallow and empty. We are second hand people. We have lived on what we have been told, either guided by our inclinations, our tendencies, or compelled to accept by circumstances and environment. We are the result of all kinds of influences and there is nothing new in us, nothing that we have discovered for ourselves; nothing original, pristine, clear.

Jiddu Krishnamurthi in Freedom From The Known (1969)

Comment:

It’s heresy to say this, but K has never appealed to me all that much….

What he says is perfectly true, and as far as I can tell, in the tradition of advaita (non-dualism), but his criticism of bourgeois thinking and imagery only goes so far with me. I agree upto the point where he talks about “flow,”much as Bruce Lee does in my next post, but when he attacks all concepts and conceptualization (maybe I am misunderstanding him?) — he loses me. It’s not concepts that are the problem but identification with concepts — or am I wrong?

Concepts and memory may be the kingdom of death….. but don’t they make up half of a whole? We exist with one foot in death.

Gurdjieff is closer to me on all this…

Global games: scenarios for future shocks

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“1) Supply Availability: Fossil fuel is not permanent panacea for our energy needs and it cannot be replenished. Various experts claim oil had “peaked” after the year 2000, and this contention is consistent with the current trajectory of oil prices. Royal Dutch Shell alone was forced to cut its reserve estimates five times in 2004 [1]. Major oil firms are desperately trying to boost flagging oil and gas production capacities and their quandary is exemplified by an over-reliance on moribund fields worldwide, a prominent one being the Ghawar wells in Saudi Arabia.

Oil is now being extracted from deeper sources through more expensive processes i.e. water injection. The price of oil will remain high.

Peak Oil is also called “Hubbert’s Peak,” named after Shell geologist Dr Marion King Hubbert. In 1956, Hubbert accurately predicted that US domestic oil production would peak in 1970 and that global production would peak in 1995. This would have transpired had the oil shocks of the 70s not delayed the peak for about 10-15 years.

2) Supply Stretch: Oil supply is so stretched that a concerted sabotage of two major pipelines in Russia or Saudi Arabia can precipitate pandemonium in the global economy. Hurricane Katrina, which, recently struck the oil producing Gulf Coast off the United States ratcheted oil to a record $70 per barrel. Major oil producing regions – Middle East, Central Asia, Russia and Venezuela – are bedeviled by terrorism and political volatility. Where stability exists, oil reserves are on a steep decline i.e. North America and the North Sea.

3) Environmental Factor: More hurricanes will ensue over the next few years in the Gulf Coast where most of the United States’ oil rigs and refineries are located. The “Atlantic multi-decadal mode” – where the “Atlantic Ocean and atmospheric conditions conspire” every “20 to 40 years” to “produce just the right conditions to cause increased storm and hurricane activity”[2]- all point to a fragile energy climate ahead. This is a factor omitted by popular literature on the looming energy crisis.

4) Global Financial Crisis: The euro-zone countries hold over $200 billion in US securities while Asia holds $1 trillion or more. This is enough to sink the US economy, though foreign parties are well aware of the dangers of redeeming these securities too soon. US domestic and foreign deficits have reached historic proportions[3]. In a classic Catch-22 situation, US monopoly on oil is being countered by a foreign hoard of US securities. A global hedge fund and banking crisis is looming as well. Banks had “created capital during the cheap oil period by lending more than they had on deposit, being confident that Tomorrow’s Expansion, fueled by cheap oil-based energy, was adequate collateral for Today’s Debt. The decline of oil, the principal driver of economic growth, undermines the validity of that collateral which in turn erodes the valuation of most entities quoted on Stock Exchanges.” (Campbell)

5) Soaring Prices: Goldman Sachs, among other reputed financial establishments, have already alerted markets of a possible “superspike” of US$105 per barrel. More recent projections place it even higher. In June 2005, despite repeated market assurances, OPEC raised its band system to US$40-US$50 (Reuters, June 24 2005). This band system may be revised further in lieu of a smooth global supply, which are not on the horizon.

THEORY:

The research is informed by the following theoretical assumptions:

The high price of oil is battering national economies, though the full extent of this will be actualized in the coming months or years. Current oil supplies have been inked and hedged in advance, at lower costs, though the rising band systems (or baskets) are placing a strain on any negotiated deals. To avoid a global industrial meltdown, or an outright collapse, oil supplies may have to be renegotiated in favor of major industrial powers like India and China to keep a crucial part of the global commerce running. There might be a further shift of basic, crucial manufacturing to these countries.

Here is a regional breakdown of scenarios underpinned by this research’s theoretical assumptions:

China: If its vast industrial expanse is threatened by an acute energy shortage, it might seize the purportedly oil-rich Spratly Islands, a chain of reefs also claimed by Malaysia, Vietnam, Brunei, Taiwan and the Philippines – all of whom are vested with greater legitimacy under the UN’s Law of Seas Convention. China’s recent moves to acquire Unocal, and even Exxon, hints at its desperation for oil. Further military escalations in the South China Sea are a distinct possibility to avert internal chaos. Taiwan may reunite with the mainland for economic reasons.

India: Now in a uniquely historical role to dictate terms to the West. Not only does it handle vital software infrastructure for MNCs, its call centers are crucial to international commerce. No other nation can produce call centers in such colossal numbers within a very short time. A shutdown of both – even for a day – will lead to financial mayhem. The linguistic edge India enjoys in terms of geopolitical power is largely ignored in international relations texts. Its industry is more service-oriented vis a vis China, and therefore less vulnerable to oil shocks.

Japan: Has been experimenting with alternative power sources for decades, some of which are already operational. Its military capabilities are limited.

Europe: Another region with a long tradition of experimentation with alternative energy. In a better position than most to weather an oil crisis.

South Korea: In a similar situation to Japan, but without a long track record of developing alternative power sources. Historically, it has resisted Chinese hegemony and might align itself to the US, even with a belligerent North Korea factored out.

Russia: Through its enormous reserves of oil and gas, Russia may aggrandize its geopolitical leverage in Europe. In the short-term, before a multifarious energy infrastructure is in place, the EU may have to make concessions to Russia.

Venezuela, Central Asia, Southeast Asia, North Africa and the Middle East: Has oil but no military capability to counter external threats.

Africa and South America: International Realism will leave little breathing space for these regions by virtue of their internal weaknesses.”

More by activist and researcher, Matthew Maawak.

Ron Paul Revolution: Huckabee on the Fair Tax – bandaid or surgery?

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Huckabee is on FOX this morning discussing the Fair Tax – an across the board 23% sales tax at the retail level and NO income taxes (or taxes on dividends and capital gains).

More on this.

Update:

Well, I’m revisiting this. To begin with, I’m always a bit suspicious of anything which uses the word “fair” (like “fair trade” versus free trade). I see why people use those terms – to point out the managed nature of our current trade regime and the unfair nature of our tax structure. But the language has something a bit manipulative about it.

Of course, Tancredo and Hunter are also proposing the same thing, although the fair tax organization itself seems to have given its support to Huckabee. That’s been to the consternation of those who see his proposal as just a slick pitch that in Arkansas did nothing more than disguise tax hikes. Haven’t investigated all those claims, but here’s one libertarian review of the idea in its fundamentals:

“FairTax proponents are correct in their assessment of the Internal Revenue Code:

The current U.S. income tax code is widely regarded by just about everyone as unfair, complex, wasteful, confusing, and costly. Businesses and other organizations spend more than six billion hours each year complying with the federal tax code. Estimated compliance costs conservatively top $225 billion annually—costs that are ultimately embedded in retail prices paid by consumers.

The Internal Revenue Code cannot simply be “fixed,” which is amply demonstrated by more than 35 years of attempted tax code reform, each round resulting in yet more complexity and unrelenting, page-after-page mind-numbing verbiage (now exceeding 54,000 pages containing more than 2.8 million words).“

AND

“Because the FairTax is a consumption tax, Murray Rothbard’s conclusion about consumption taxes is apropos:

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.”

That’s from Lawrence Vance at Mises.org.

I agree with Vance on at least one thing. If this were as a good proposal as it sounds, off the bat, Ron Paul would have been on board. Since he’s not, I have to have reservations…

Here’s Paul on the flat tax:

“I apply a very simple test to any proposal to overhaul the tax code: Does it reduce or eliminate an existing tax? If not, then it amounts to nothing more than a political shell game that pits taxpayers against each other in a lobbying scramble to make sure the other guy pays. True tax reform is as simple as cutting or eliminating taxes. No studies, panels, committees, or hearings are needed. When reform proposals seem complicated, they almost certainly don’t cut taxes. Congress should simply focus on cutting existing taxes and reducing spending, instead of complicated overhauls of the system.”

‘Nuff said. Like all Paul’s arguments, they are the highest level emergency surgery, the kind that saves life. No band-aids that let America bleed to death while the federal government waffles.

Strike at the root: fix the pipes or fix the pipe-dream?

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“It came as a shock to me that India’s cities have more water than most cities in the world. Delhi has 300 litres per person per day of treated water compared to Paris with 150 or London with 171. Then why do people in Paris and London get water 24 hours a day while Delhi’s residents get it only for four? Gauhati sits on the Brahmaputra River but people get water for only two hours. The poor in our cities have to depend on tankers. When the tanker is late there is a scramble and even a riot. Recently, a tanker driver fearing for his life took off at a high speed, and a child died in the chaos.

Because water comes intermittently, Indians have to store it. Storage tanks cost money and are not cleaned regularly. This brings disease. Since water pipes are not under continuous pressure, they get broken when pressure is released–it’s called the ‘hammer effect’. Vacuum also develops in the pipe, and ground and sewage water enters through the cracks, thereby contaminating drinking water. It takes 90 minutes to re-pressure, dump the contaminated water, and lots of clean water is thus wasted.
Everyone has a diagnosis. Delhi’s Jal Board says that 40% of its water is stolen. Its zonal engineers want more pipes and infrastructure. (Lucrative contracts bring prosperity to engineers.) Economists say that Paris charges properly for its water; hence Parisians don’t waste it. Delhi’s water charges are so low that there is little incentive to conserve. Besides, low tariffs help mainly the rich because the poor don’t have taps. All these facts are true but the main problem is the Delhi Jal Board. It is a fiefdom of politicians with 20,000 employees when it should have 5000. It doesn’t meter properly, encourages theft, and is not accountable to customers.

Delhi’s government, to its credit, recognised the problem and decided to fix it. It tried to insulate the Jal Board from politicians and test a plan to give water 24 hours a day in two out of its 22 zones. It offered management contracts to experts, who would motivate Jal Board employees to reduce theft, extend taps to poor areas, and be responsive to customers. It also decided to take a loan from the World Bank for this project. This is when its problems started. A well meaning but ideological NGO, Parivartan, claimed that the process of hiring consultants was manipulated. It raised the fears of privatization, mobilized public opinion, and killed the reform. With it died the prospect of 24 hour water for Delhi.

The Greeks were suspicious of democracy. They felt that people often made bad decisions that went against their interest. People could be manipulated by demagogues and vested interests. In this story, vested interests were the local politicians, bureaucrats and Jal Board employees. They manipulated Parivartan to become their demagogue. They scared Delhi’s people and a workable reform failed. Sad, indeed, for it kills 24×7 water in other Indian cities as well.

The lesson from this sad story is that it is not easy to reform in a democracy. Reformers have to win over the people when they change institutions. If Sheila Dikshit had worked as hard to “sell” this reform as she had to conceive it, she might have saved it. We are facing another summer of water and power shortages and politicians have begun to make ridiculous promises. The answer is “not to fix the pipes, but to fix the institutions that fix the pipes.”

More by Gurcharan Das at the Center for Civil Society.

Econ-job: The Starbucks indicator…

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Apparently, it’s not only the buck that’s in trouble. Starbucks

is getting…er….roasted.

Shares in Starbucks fell on Thursday after the coffee chain reported the first quarterly decline in sales at its US stores.
Peter Schiff, best-selling author of “Crash Proof,” is on Neil Cavuto this evening, breaking the news about the yuppie favorite (who else would shell out five bucks for coffee, you tell me). Starbucks sales are taken by some to be an indicator of consumer strength.

Here’s what one analyst says:

“If their customers are more budget-conscious this year than they were last year, latte purchases will suffer. If customers feel better about their near-term financial picture, an extra one now and then doesn’t seem so frivolous.”
The other commentators on Cavuto were quick to rush in with excuses: it’s actually only Starbucks’ blue-collar clientele that’s feeling the pinch, they said; the rest of the coffee-swilling crowd is as full of – well – beans as ever.

So is it just Starbucks’ business model that’s slipping or the economy?

Or has it something to do with the exchange rate?

Global Games: Asians want to eat too..

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“Imagine if five people were washed up on a desert island: four Asians and an American. In splitting up their duties, one Asian says he’ll fish; another will hunt, another will look for firewood, and another will cook. The American assigns himself the job of eating.“The modern economist looks at this situation and says the American is key to the whole thing,” says Schiff. “Because without him to eat, the four Asians would be unemployed.” The alternative: Without the American, the Asians might eat a little more themselves and even spend some time building a boat. This is happening as we speak: With the rise of the Chinese consumer class, the local citizenry is now spending, and the country is no longer totally dependent on exports. Which means they’re no longer totally dependent on us.

Readers of the financial press are surely familiar with the buzzword of the moment, decoupling. It’s used to describe how U.S.-Europe and U.S.-Asian trade relationships are becoming less dependent at the same time as European-Asian ties are growing. Most Asian nations, including China, are seeing more rapid growth in exports to Europe than to the U.S. And the U.S. now accounts for a declining share of European exports. The bearish interpretation: that the longtime global embrace of the dollar is loosening.”

More at the NewYorker by Duff McDonald.

Ron Paul Revolution: Taking on Malcolm Gladwell at Forbes

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Irrational People
William Bonner and Lila Rajiva 10.25.07, 6:00 PM ET

Bill Bonner and Lila Rajiva
 
 
 


 

No prejudices are more dangerous than those you didn’t know you had. And no one is more likely to crash into them than one who believes he is impartially examining the facts. That is the trouble with theories about man that assume he is a rational decision maker. All the evidence we have points to the contrary.

What rational commuter, for instance, would buy a Hummer? People buy them not to get somewhere but to tell others that they have already arrived. And what reasonable man would waste his time going to the polls? The rate of return is so uncertain and so remote, he would do better buying a lottery ticket.

But even otherwise insightful writers make the mistake of assuming that when people make choices, they either make rational choices or honest mistakes. Malcolm Gladwell’s best-selling book, Blink, for example, observes that rapid cognition–instinctive reaction without prolonged deliberation behind it–is often the best way to make decisions. He cites approvingly a group of art experts who were able to tell at a glance that a Greek statue was a forgery.

But there are other instances when the results of rapid cognition don’t meet his approval. While only 3.9% of adult men in America are over 6’2″, almost a third of all American CEOs are 6’2″ or taller.

There must be some mistake, says Gladwell. People ought not to pick tall men to lead companies simply because they are tall. In response, we ask, why shouldn’t they? People who choose tall mediocre CEOs over short extraordinary ones may actually be expressing a real preference, even if they explain it away later as a bias. The preference may be rooted in genetic drives that find tall males inherently more likely to dominate and succeed in the reproductive game. Or people might have an aesthetic preference for an imposing appearance. Or they might intuitively feel tall leaders might be better at gathering followers. This might be what people really want, and not a CEO who can increase company profits.

Gladwell himself recognizes this when he notes that in speed-dating the kind of men women actually pick is very different from the kind they say they want. Yet, then he goes on to find decisions based on such hidden emotions and preferences unacceptable in certain cases–say picking a CEO or a member of a symphony orchestra–because they don’t accord with his idea of how these decisions should be made.

The same bias afflicts research into economic decision-making.

In 2005, Princeton Professor Daniel Kahneman conducted an experiment comparing the performance of people with a kind of brain damage that inhibited their emotions to the performance of “normal” people at guessing the results of coin flips. Those with “normal” brain function lost their shirts. Their emotions made them make mistakes, said the researchers.

This August, researchers at the university of Maryland studied stock traders and came to the opposite conclusion. Hot heads who experienced greater emotional intensity when faced with their decisions turned in better performances. Emotions helped them maximize returns. Score one for Jim Cramer.

What is more telling than the contrary results of the experiments is that, in both cases, researchers assumed that the participants were simply trying to maximize their returns. It is true that many may have thought they were doing so. But their actions betrayed other motives, such as, a desire to play it safe, or to have fun.

If human beings only did things out of economic self-interest, then buying stocks when prices are high or investing in subprime mortgages would be mistakes. But if investors, like everyone else, are expressing other, more complex and subtle motives, then their bad economic decisions might be bringing them other rewards. They might want the security of being part of a crowd. They might want to feel smart, or cool. They might invest to make money. Or not to lose it. To make a point. Or to make a better world.

Yes, “good leaders” probably do come in any size. But it may not be a “good leader” (whatever that is) that people are looking for when they pick CEOs or Presidents.

As it is not necessarily economic self-interest that men are pursuing when they enter the investment markets.

William Bonner and Lila Rajiva are the authors of Mobs, Messiahs and Markets .