The word "panic" is the one to watch. We're seeing it pop up in reference to the markets.  Here's an example headline:  "Mkts plunge: Sensex, Nifty end down nearly 3.5%"

But the word panic isn't showing up just in market news.  Farmers in Iowa are being told "Don't Panic Over Iowa Rust Discovery" - a reference to soybean rust which can inflict massive damage on crops. 

OK, let me see if I have this right:  The US is the largest debtor country in the world, we're going to start using corn to make alcohol, which will drive up food prices.  We have an ugly war going on with no way to exit. Now we have soybean rust discovered, the Vice President going to AIPAC and saying "It's the US and Israel against all comers", and the subprime lending market is going Titanic on us.  Oh, and my friends who see such things say 'down for a year' or there abouts.

On the upbeat side, my deflationist friend Jas Jain, sent me his analysis/memo of yesterday's action

"The US Recession Forecast ON SCHEDULE

My forecast of the recession for the US economy to begin in March’07 is on target and if it proves to be off target it would be no more than by two months. The market-based confirmation that the economy is already is a recession would come when the yield on the 10-year US Treasuries stays below 4.5% for a week (today it sled below 4.5%). I expect that to happen soon.

This would prove to be the easiest recession one ought to be able to forecast since the 1950s. Strapped consumer, the US auto industry in recession, housing in recession, manufacturing in recession, what more does one need to forecast that economy-wide recession can’t far behind?

The proximate cause as well as the real cause would prove to be the housing recession that has been underway. Finally, it has reached the point where the economy wide recession is imminent and UNAVOIDABLE, Fed rate cuts or no Fed rate cuts over the next few months.

The greatest housing bubble of all times was caused by the most well-known of the characteristics of the US system – Bankers’ Mischief, whereby the bankers play loose with lending standards, and financiers behave silly like drunkards. Bankers’ Mischief has NEVER failed to cause economic catastrophes, a term by which Schumpeter meant depressions. Therefore, my forecast of the next depression to begin no later than 2008 also remains intact. But, the recession has to begin first. So let us monitor one step at a time."

Now thing back to what Robin Landry mentioned a few reports back:  "If we break support at 12,000, then the next stop is 10,700..." was how it began.

So, armed with more popcorn, I'm about 80% confident that today (or later in the week) the market will slip under the first line in the sand.  But not to worry - the web bot project is just for entertainment value - and so are paper assets.

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Elaine came over to my office from the main house about mid-session Tuesday (after the Countrywide exec was interview on CNBC saying mortgages were in a liquidity crisis) wanting me to explain how all this could play out.  I told her: "It goes something like this:  We have millions of Baby Boomers who have been salting away their money for retirement and they all moved into a huge "wooden theater" in the sense that people have piled into paper assets like it's opening night.  Almost no one I know (except Jas and me) have their houses paid off.  In fact, almost everyone in the theater knows that it's a fire trap.  Yet, where we are now is smelling the first bit of smoke and we're hearing advice on television not to panic ."

"Think about it: You're in a wood theater that over-crowed, there's smoke, and people are using the words "don't panic".  That's a precursor to a deadly stampede."

As I have observed many times, when the handwriting goes up on the wall about the view of a market, declines are not ordered.  Whether it's a crowded theater, or a wildly overpriced stock market.  Things decline in chaotic ways once they reach a point.  Once some critical mass of people (and it only takes one to be visible to start the stampede) is reached.

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As the fire begins to swirl, and the stampede starts (at least linguistically) over coming weeks and months, I want you to notice how two very culpable parties maneuver their public image/spin to avoid any responsibility for the evolving firestorm. 

The first group is appraisers.  If you run a Google news check on the word "appraisal" you'll see that there's no one standing up and talking about the appraisal system, which in many parts of the county has almost been a "pay for a number" system.  As a story on KOAA headlines "Local appraiser's license revoked, state promised broad crackdown."  But, we're skeptical that any steely-eyed review of the nation's appraisal system will happen any time soon.  There's just too much money on the table.

Part and parcel with this overblown appraisals are the county tax assessors who have financial incentives to raise taxes as fast as they can in order to hire as many public servants as they can.  In other words, the assessors are also culpable.  One reader email nails it:

"The problem is that there is no cap on the City Real Estate Assessor’s office. For multiple years in a row the City has raised assessments by double digits. This year we have been assessed an additional 21%. Of course those lucky enough to live in what is deemed prime addresses are whacked the most. My Father in Law is xxx yrs old. He has done well in his working years and built a new home 2 years ago. This house is sitting on the corner of a main street that leads to the ocean front. I might add it was a vacant lot on a main road since the beginning of time (not desirable is the point) but he was good enough to improve it. He has been assessed twice in the past 12 months and that has taken his total assessment up $700,000. Yes, I typed it right. That means his taxes have gone up $7,000.00 in one year. He was told by phone that there was property that sold near him located on the ocean front for over 2 million dollars and if his were to sell then he would probably get near that. His response was: “when or if I sell then tax me and the last time I looked I see no water”. My FIL is not stupid. He has decided to go to the Council Meeting this week and let them know how ridiculous this is. "

But come on: the problem here is that he will be able to talk till he's blue in the face and the fact is that county government's growth is all funded by higher tax revenues and those come - in the main - from higher assessments!

Deep down in side, I'm an (old time republican) small government man.  Why?  Small government is more affordable than BIG government - which means it has less incentive to raise what?  Appraisals!

None of this will change, of course, but as the People's Economist, I thought you'd like to know that there's more than one dirty hand in this -- I mean besides the subprime loan and no docs loan types who are today's whipping boy.  Stick around, plenty more beat downs to come.

The Bloomberg report on "Phantom Shares" which covered naked short selling, is just another example of the dirty laundry of paper assets starting to get aired out. 

When I told you long ago that the HPH libretto for the future wasn't just about stocks, housing, or naked short sales, but was about paper assets as a class of investment, I hope you took it seriously and did what you could to position yourself.  Now, it's starting to arrive front and center.

Are there other stories this morning worth reporting?  Not in comparison to this, so I'll stay highly focused in our specialty.  Something to think about while you're munching popcorn and looking up at Dow 12,000 idly asking "Gee, how bad can it really get?" 

Got a year's worth of popcorn?

Tuesday March 13, 2007

Straw, Canary, or Natural Disaster?

The mother-giant, be-all, end-all financial story to be watching lately is the condition of subprime  mortgage/lending  companies as the housing bubble unwinds.  As such, they can be viewed in three ways:  The could become the 'straw that breaks the camel's back', or the 'canary in the mine' more gently telling us the good times are ending, or they could just be a 'natural disaster' founded on human greed, and compounded by  the never-ending drive to be constantly growing both the top and bottom lines.

Whichever way history records it 5-10 years from now, you might want to put a little money on all three possibilities because it's not clear yet how the story that New Century Mortgage will play out.  The most recent headlines go to the idea that "New Century gets Default Claims, Says it Lacks Cash" and that's not the kind of news shareholders like to get.

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I don't usually talk to readers, but last night I happened to have a few minutes when a Peoplenomics reader (info) called and wondered how he might be able to 'wake up' his kids who were in the financial sector to the possible dangers ahead.  The problem, as I described it to him, is that reporters seldom have the time/space/or ink to restate the historical context of many large stories, and it's useful to remember the historical sequence of events that got us to the present moment.

• In the beginning, people owned property (fee simple)

• Then along came mortgages.  Where a bank or private party lent the funds to buy a home or some land.  At first, high down payments were the rule --50% and more had to be put in by the mortgagee as a downpayment and to insure that if property prices fell, the borrower would never be 'upside down' on the property; which is to say they would never be inclined to say "screw this" and walk away from it.

• Over the course of time, from the bottom of the secondary long wave depression of the 1930's (circa 1937) the country went through an unprecedented growth period as we emerged as the global super power.  Downpayments declined over time.

• At first, mortgages were generally made by 'pure' banks.  Then a few insurance companies got into the commercial buildings.  Along came Savings Associations./Savings and Loans (S&L's).  These all worked the available mortgage market by adjusting rates and borrower qualifications, and "conventional" financing evolved to where putting 20% down became sort of the norm.

• As the country grew rapidly, especially with the Baby Boomers entering the market in the late 1960's through 1980's, abuses began.  There was a wave of S&L failures across the US with more than 1,000 S&L's.  To clean up the mess, which cost about $150-billion, $125-billion of tax money was used.  The S&L crisis may be viewed two ways:  As the first collapse of sub prime lending as people who couldn't afford homes but were allowed to buy them (which has a familiar ring to it), and as a massive case of fraud, where S&L 's were sometimes involved in loaning money way in excess of a properties value to "friends" who took the tax-free loan proceeds from excess valuation refi's, put the money offshore in places like the Cayman Islands, and then declared bankruptcy in the US.  Trustees offshore hid the ill gotten gains (IGG's).

• In the decades that followed, a new type of finance was developed to 'package" loans using a technique called "collateralized mortgage obligations" (CMO).  The way this works is simple:  You take a pile of mortgages which have generally understood risk and roll them up into a "bond" of sorts which is then floated to Wall Street.  Trades like a bond, pays like a bond, and there's an underlying secured asset like a bond.

• All of this works fine until something runs off track.  The first thing that can go wrong with a CMO/real estate 'bond' is that underlying housing prices may fall, while the second is that the underlying mortgagees can prove to be even less credit-worthy than initially estimated by the bond makers, and the bond's value can fall excessively.   Then the bond buyers wants their money back.

   

  The rate of the fall of 'housing bonds' still depends on the value of the underlying home and the continued income of the mortgage holders as a group.  But over time, greed entered the picture and the practice of refinancing a family's home to make ends meet had become commonplace by the early 2000's.  Then, as housing prices failed to continue their upward spiral (falling in many areas by 20-30%) it began to set off a chain reaction of events.  Perhaps 70-75% of all real estate mortgages have been originated since 2000. Many properties have two or more mortgages and many borrowers are "sub-prime" - overly in debt compared to their assets and incomes - just a layoff away from financial disaster.

   

  As I wrote in 2002 when this all became apparent:

  "I think it should be obvious to anyone with a nickel's worth of brains, that we are presently in a global deflation and that bankruptcies are continuing to increase as an every faster rate.

  Reflecting this, the price of housing is beginning to drop in some areas, and as it does, we can safely see that over the next year or two the foreclosure and bankruptcies rate will continue to increase. It will also signal a change in many financial instruments, such as collateralized mortgage obligations (those baskets of mortgages) because going forward, the discount used in pricing will have to incorporate a much larger "bad debt" component.

  To put it mildly, we are not even close to the end of the beginning, but we are getting closer to the beginning of the end. "

   

• The end of the life-cycle begins when the people who have bought "real estate bonds" (if we're to call them what they are) become disenchanted with the bond's performance and try to return them to the outfits which created the bonds from bushel baskets of mortgages.  Remember those "no docs" loans?  There was so much money to be made in the refi bubble (endorsed one could argue by the Greenspan Fed) that housing prices soared nationally, just as easy money propagated the S&L abuses of the 1970's and 1980's to precipitate that crisis.
• And just to make it all ever so much more interesting, there are derivatives (options on piles of real estate bonds) used as collateral for other lending.  The tower of finance climbs higher, creating money/profits/bonuses as it goes.  Or should that be "went'?

Tweaking Iran

Cleveland Rocks

Global Warming

DNS:SOS

New Tool

You might notice the Technorati link at the top of the page today - feel free to post UrbanSurvival to your favorite RSS sites.  Is adding a Digg link worth it?

 

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Monday March 12, 2007

Mondaying

Pronounced "mundane" and meaning nearly the same, today starts both in the "normal/routine" sense of the word as well as the "modern" in that today is yesterday's future. To be sure, there are a few headlines out there which catch the long term strategic planner's eye, such as a report to be released next month which says chaos is coming - but not till mid-century, and the big brush fires that are burning in Anaheim California. Superficially, though, it looks like 'Mondaying' events rule.

 

Which is fine by me, because I'm not adjusted to this new 'daylight savings" time: the change this weekend must mean that daylight is being saved for other people who don't rise as early as me.  One of the big questions is why was the change made in 2005 and not implemented until this year?  It strikes me as odd.  Ostensibly it is to 'save energy' but the lost productivity of people screwing around with clocks has to be worth something on the other side of the equation. I'm not worried though - as I'm sure at some point today my phone will start ringing off the hook with offers of big bucks for my latest invention: variable speed clocks, which I stumbled across during a life and death struggle to wake up on Saturday.

 

The idea is that variable speed clocks would keep all days precisely the same length - and adjust for the old-fashioned 'fixed minute duration' style of timekeeping by varying the clock speed.  Thus, I could always depend on going to be at 9 PM, rising at 5 AM (getting 8-hours of sleep) and have it be dark no matter what time of the year it is.  In the winter, a one hour TV show would be longer - and as compensation for the much shorter (old style - fixed minutes timekeepers), we would get more (old style/fixed minutes) of sleep.

 

Variable speed whizzies are appearing everywhere, I reason, so why not clocks?  The Orlando Sentinel headlines that a 'variable speed pump can save money' and the PWM crowd (that's pulse width modulated [motor] controls gang) has their new variable speed brushless blowers.  Nissan's new SE-R is available with a continuously variable transmission.  So is it that far-fetched?

 

Now, just between you and me, I know for dead certain that the technology is already available.  My evidence?  Some days my computer simply runs faster or slower than other days.  I reckon Intel or MSFT has already got a variable speed component either burned in to some masked part (if you don't know what a masked part is, study up on ASIC's and get back to me) or in the 60 terabytes of code that embody the Vista Ruler of the Universe and Everything In It Dilithium Crystal Edition .  But I digress.

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Sometimes, it's just time.  As in 'time for the French president Jacques Chirac to go.'  Bye. Bye.

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Speaking of time, here's a little linguistic backwater for you:  A headline in the Chicago Tribune that reports "Face time can be tough to replace."  We've been using the term since late 2004 and there are now 1.8-million Google hits for the phrase. My younger sister at Boeing is still seeding her company with the term "face-mail" - so set your variable speed calendars - it should go mainstream in about 2 1/2 years. Only 20,700 Google hits now and most of them aren't referring to management/HR uses - most are for phrases like 'so and so is to face mail fraud charges' - that sort of thing.

 

The term "jacked" which the time monks of HPH pointed out to us a few years back  (as in: "my homie jacked my car") is growing well - 3.6 million hits, but contextually the usage is not mainstream yet - but coming.  Wait!  Did I just digress?

 

Gonzalez Under Fire

Democrats are calling for the resignation of Attorney General Alberto Gonzalez in the wake of revelations that the FBI improperly used the Patriot Act.  Quick - look surprised.  This is the kind of story/non-story that makes headlines when we're waiting for release events later this week.

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Text message about being worried of a possible hijacking turned around an airplane in India today.  Say: jumpy.

 

Middle East Watch

Well connected Debka.com is report "Israeli military and government sources report Syria has positioned thousands of rockets on its border with Israel."  

 

What worries me is that although there is some happy talk about the US - Syria - Iran talks, if something goes seriously awry and Iran and Syria walk out, things could deteriorate quickly.

 

Seat belt tight?  Thursday is the Ides of March.

 

M&A Deal o the Day

Schering-Plough is buying an Akzo business unit (Organon) for $14 billion.  On Wall Street, this has the futures up ahead of the open, but here at the ranch, I find the closeness of spelling of Organon to Wilhelm Reich's "Orgone" about equally significant to the market action.

 

Numberplating

New word meaning: "the contemplation of numbers/statistics".  Numberplating. 

 

Example:  Reading the Friday Jobs Report we recall non-farm employment was up 97,000 in February. 

On the other hand, the CES birth-death model (which estimates job creation that's off/under the radar) showed 118,000 'statistically created' jobs for the month.  So was there a gain or a loss of jobs?  Let me numberplate on that and get back to you.

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Labor Department's Consumer prices come out Friday. Oh goodie.

 

300 = $70,000,000

Hell.  All this time I thought Thermopylae was a kind of injection molding plastic. Apparently it's a movie, not a prototyping material.

 

House of Wine

A house in Western Australia is being built entirely from recycled wine bottles.  Gets me to thinking about doing the same here at the ranch, only using vodka or rum bottles.... 

 

We do have to wonder if the bottles are matched with different interior design themes.  Nautical theme for the Port room.....German theme for the Rhine Room...a Blue Nun room, perhaps?  Maybe a rather smallish petit Shiraz room?  A macabre themed Gallo room...railroad themed Night Train room, and a garden room for Wild Irish Rose. This is all starting to make sense now.

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Maybe my computer room would be named the Cisco room - not for the routers but for the wine Cisco.  Too early top start making construction materials, though, at least by my variable speed watch.

 

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Write when you get rich,

 

George Ure, The People's Economist