Sunday, November 11, 2007

Starting to Get Worried

I am not one of those types that thinks the end of the world is coming. I do not have a bunker somewhere stocked with firearms, food, water, and gold bullion. The events over the past couple of weeks have been basically expected to me (skyrocketing foreclosures, massive bank losses, home price declines, etc), but there are now some things going on that I feel a bit uneasy about. While I am not losing any sleep as yet, there are a few recent developments that have increased my concern level.

The Dollar
To be honest, I never thought the dollar would fall past the 79-80 level on the index. That has been a long term support level going back to the beginning of time. The dollar was at 75.4 on Friday. I am hopeful that the drop to the 75 area is warning from the foreign buyers to the FED to stop the baloney and stop cutting rates. If the dollar trends down to the 70 level on the index, I think there is going to be a major currency event. I do not know enough to say exactly how something like this manifests itself, but it will not be fun or funny. Will the dollar stop falling? Not if the misguided market has anything to say about it. Check out this headline from today:
Investors Brace for More Bad Bank NewsSunday November 11, 2:21 pm ET By Madlen Read, AP Business Writer
Wall Street, Bracing for More Bad News From Banks, Also Awaits Retail Sales, Price Indexes
NEW YORK (AP) -- The stock market this week is hoping for signs that the economy is surviving the problems in the financial sector -- and that the Federal Reserve will come to the rescue if it's not.
Read that last sentence again. I do not think a rescue means holding rates steady or raising them. At this late a date in the dollar's demise, that mainstream thinking still holds that rate cuts will save anything is bemusing. At what point will trying to reignite fake demand through cheap borrowing take a back seat to rampant inflation through currency devaluation?

SIV Superfund, Only Help at the Margins?
Remember back when the proposed SIV superfund was going to be the saving grace for the troubled mortgage market? Hanky Panky Paulson was even out cheerleading the fund. Now things have changes quite a bit. In the NY Times today there are some choice comments from Paulson that really pit a chill down my spine:
"Now, Henry M. Paulson Jr., the Treasury secretary, is describing the proposal’s benefits as helping “at the margin.” In an interview on Thursday, before the latest agreement was made, he acknowledged that the proposed backup fund would not rescue troubled SIVs, only lead to a longer and more orderly demise.
“This is something that is not a savior,” Mr. Paulson said, noting that he expected the fund to begin operating by the end of the year. “Anything at the margin that will speed up liquidity is worth trying
WTF? A 75 Billion fund can only help at the margins? Paulson has changed his take on things in record time. The comments in the NY Times piece say to me that Paulson has finally seen the extent of the problems facing the crap paper market, and he knows nothing can be done to save it. Preparing an orderly demise is what you do to something terminally ill, and it seems that is where we are. How big are the problems and losses? Apparently big enough to morph Hank from a cheerleader to a pall bearer in the span of a few weeks. This is HUGE news, but do not expect much coverage from the mainstream media.

How Much F#cking Borrowed Money is Fannie on the Hook For?
At Housing Panic today, I read a post that was so shocking that I had to reread it several times and check the whole linked piece to make sure I was not hallucinating. Full post here:

These excerpts are from the reform hearings on Fannie and Freddie:
The housing GSEs are among the largest borrowers in the world. A comparison I like to make is when you add Fannie’s and Freddie’s outstanding debt of almost $800 billion each, with the FHLBanks’ debt outstanding of $900 billion, and Fannie’s and Freddie’s net guaranteed MBS of $2.9 trillion, it comes to $5.4 trillion. That is bigger than the $4.9 trillion publicly held debt of the U.S.
Like other financial institutions, the housing GSEs face a full range of risks, including market risk, credit risk, and operational risk -- only on a much larger and more concentrated scale than other financial institutions.Fannie Mae, Freddie Mac and some of the FHLBanks have each experienced serious difficulties handling those risks over the years. Current remediation efforts will help reduce operational risks, in particular, but all three risks will continue into the future
$5.4 TRILLION?! I had no idea on the enormity of the Fannie and Freddie monster. Fannie cannot even provide financial reports because the books are so cooked. Any other company would have been delisted due to this fact, but not Fannie. Now I think I know why. To be sure, nowhere near the $5.4 trillion is at jeopardy, but some of it is. Boom Boom Bernake wants to increase the limit Fannie can buy mortgages from around 400k to 1 MILLION dollars. That possibility must be opposed at all costs. In the end it will be the US taxpayer that will foot the bill for any losses from these mortgages. Again, I had no idea of the shear vast numbers involved in the housing bubble.

That is three things I am keeping my eye on for now. The stakes seem to go up every week. A full reckoning will have to be done for the ridiculous money pit that was the housing bubble, and that day is coming soon. It is hard not to be angry and bitter about the mess we are in. I played no part in the real estate madness of the past few years, yet I am likely to suffer just the same. Shame on all those that thought they could get rich for doing nothing. Shame on all those that could not stop themselves from ignoring reality.

Have a good night.


Anonymous said...

This is what I am going to do once it all comes crashing down!

Laugh my ass off!


Anonymous said...

As far as the dollar here are the choices.

The dollar could stabilise. The Fed thinks investors may have already priced in the decline needed to moderate the US deficit. If it does stabilise, it will remain largely a problem for foreigners.

The dollar could continue to decline, but in an orderly manner, with no increase in the risk premiums foreign investors demand to hold US assets. If so, it will also remain largely a problem for people outside the US.

Or the dollar could continue to decline in an increasingly disorderly fashion, accompanied by rising risk premiums on US assets. If so, it will become a big problem for the US. This should not be ruled out. The risk of a US recession has increased following the credit squeeze, reducing the attractiveness of US assets.

Meanwhile, the likelihood has increased that one or more of the nations that tie their currencies to the dollar could break the peg, reducing a source of demand for dollars. Moreover, the spectacle of US banks struggling to figure out how much they have lost on credit products has shaken confidence in US markets.

The latest decline in the dollar has been accompanied by a falling stock market and rising credit spreads. This could be a coincidence – US long-term bond yields remain low. But it could be a sign that foreigners are starting to demand higher returns on dollar assets. In a worst-case scenario, fears about the dollar could lead to a scramble for the exit. The Fed would come under pressure to raise interest rates to prop up a collapsing dollar and offset its inflationary impulse – at a moment when the economy might desperately need rate cuts. Such an extreme outcome is still unlikely. But even if this episode ends happily for the US, there are lessons to be learnt.

First, as monetary policy works increasingly through exchange rates, central banks will be exposed to international political controversy.

Second, the large US current account deficit complicates the Fed’s efforts to deal aggressively with risks to growth, because a deficit economy is always potentially vulnerable to a loss of global investor confidence.

Third, there are circumstances in which the Fed might not be able to rescue the economy and US financial markets. For investors accustomed to believing the Fed is all-powerful, this is a sobering thought.


Anonymous said...

The dollar could continue to decline, but in an orderly manner, with no increase in the risk premiums foreign investors demand to hold US assets. If so, it will also remain largely a problem for people outside the US.

Right! Fortunately we don't buy anything abroad. And the fact that a barrel of oil is only 60 Euros - that don't either I suppose.

Get a clue!