patrick.net

Randy H,
One point I disagree with you on is the fate of tech companies in this upcoming downturn. They will likely not suffer directly from the RE fallout, but I believe they are in for a world of hurt from the overall "credit crunch." Startup funding WILL diminish - this will take a while to work "through the system" in the form of weeding out the BS social networking/web 2.0 type startups. However, the tightening of credit will mean leaner times across most sectors, resulting in trimmed capital spending, which I think will significantly affect tech companies, both big and small. This will probably take a couple of years to have a real noticeable effect on Bay Area jobs (2008-9) I predict...

The Fed takes the toxic waste as collateral and gives the banks Treasuries notes to use.

This is not correct. The Fed only takes guaranteed (Fannie Mae and Freddie Mac) MBS as collateral for loans.

Jimbo: So if the default rates are higher on FM/FM loans, who guarantees the MBS performance? As I understand it, the Federal government. Which means the taxpayers would eat the difference.

There is much more pain still to be experienced as the combination of excess leverage, MBS and carry-trade liquidity passes through the financial sector's lower intestinal tract. There will be one major fracture in one of the big pillars of the current financial market structure - this could be one of many things - a collapse of a big bank, a sharp reversal in carry trade, a major political upheaval, a US/China trade spat, another terrorist attack on the 9/11 scale, etc. What makes prediction very difficult is that we don't know which one of these supports will break, and each will have a different set of after-effects.

However, just based on what has already happened, I would guess a general recession is a strong possibility. The lack of 'free' home-equity money itself will cause consumer spending in big-ticket non-essentials to drop sharply. The psychological effect of the R-word will have an even greater lingering impact.

I am not so confident about the Bay Area either - depending on the extent of the recession (plus on the unpredictable 'fracture'), corporate spending could be tentative and cautious. Coupled with a general bust in the "me-too" web2.0 employment sector, I expect the job market to be considerably less fun in a few months time.

(Can someone dig up a link to the previous 'Prediction' thread? I think we had correctly predicted the sub-prime bust this summer. Would be fun to go back and check...)

SP

Well, I just picked up a copy of _Manias, Panics, and Crashes_ yesterday, so it will take while longer to finish. That said, I think we will see a collapse (or bailout) of at least one major financial institution. While the Fed's repo operations this past week weren't that large, the European Central Bank alone provided about $212 billion on Thursday and Friday. When looking at the collapse of IKB, it looks as though the other German banks may have exposure.

It's really not comforting to read statements like this one from WestLB:
``We're relatively relaxed regarding the long-term valuation of our securities because of their high underlying quality,'' spokesman Hans Obermeier said in an interview today. Of the subprime securities, 98 percent are rated A or better and 87 percent AA or better, he said.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agzHof0_tkRQ

According to the article, WestLB has about €1.25bn in such securities, but I don't know if that includes their Brightwater unit; my guess is that it does not (I guess most of the banks there set up such subsidiaries to make such investments). So, the above was more about Germany, mostly since I was trying to find more info on last week's rumors about the ECB shutting down interbank lending for a few hours to bail out a major German bank or two. The feeling I get is that the situation is not much different back home and that a significant credit event is still coming down the pipeline.

For the Bay Area, my sense is that there's still plenty of cheap money around (be it from Web 2.0 or elsewhere) that could vanish relatively quickly in a recession, so I'm still betting on a decline. I'll try to get a better prediction in tonight, since I have socializing to do today.

Jimbo Says:

August 12th, 2007 at 2:20 pm
The Fed takes the toxic waste as collateral and gives the banks Treasuries notes to use.

This is not correct. The Fed only takes guaranteed (Fannie Mae and Freddie Mac) MBS as collateral for loans.

This is the first and only time I know of that the Fed did take MBS's (and they took only MBS's) as collateral for repos.

The U.S. federal funds rate opened at 6 percent, a six-year high. It sank as low as 1 percent in late trading, according to ICAP Plc, after the New York Fed staged three repurchase operations, buying assets including mortgage-backed securities. The total of $38 billion, following $24 billion yesterday, was the highest amount of temporary funds since Sept. 12, 2001.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aVxY19yfBpAI&refer=home

>> This is not correct. The Fed only takes guaranteed (Fannie Mae and Freddie Mac) MBS as collateral for loans.

http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

Typically, when the Desk arranges RPs it accepts propositions from dealers in three collateral tranches.

In the first tranche, dealers may pledge only Treasury securities.

In the second tranche, dealers have the option to pledge federal agency debt in addition to Treasury securities.

In the third tranche, dealers have the option to pledge mortgage-backed securities issued or fully guaranteed by federal agencies in addition to federal agency debt or Treasury securities.

From time to time, for operational simplicity, the Desk has arranged RPs just in the third tranche, under which dealers have the option to pledge either mortgage-backed securities issued or fully guaranteed by federal agencies, federal agency debt, or Treasury securities. Today's RPs were of this type.

Yes Randy, I realize we're supposed to "ignore the trolls" in this thread, but I feel the need to clarify one of TOS' preposterous contentions/threats. She makes the assertion that per the recent NYT article, interest rates for prime jumbo mortgages are now 13%.

First, the article itself clearly states that the example it cites is unusual. Most jumbo rates are less than 100bp higher than "conforming loans" per the same article. Second, even if rates shoot up, the consensus is that this is a temporary spike, and the rate will likely settle out much lower, albeit higher than it has been in recent months. Third, higher interest rates affects all buyers except those planning to pay entirely in cash. This means this will merely be yet another downward pressure on home prices - all the more reason to continue to wait, at least in the intermediate term IMO.

PermaRenter,

>In the third tranche, dealers have the option to pledge mortgage-backed >securities issued or fully guaranteed by federal agencies in addition to >federal agency debt or Treasury securities.

This is another important tidbit about how the whole "injection of liquidity" works, and an important point that I missed in our previous go-round on the topic (last thread).

Per the above statement. it appears that various Fed primary dealers (big banks, big Wal Street brokerages, big foreign banks) pledged their "good" collateral (Fannie Mae bonds etc) to get cash to shore up their bad collateral, namely subprime/Alt-A MBS bonds.

It is starting to make sense how this causes the losses and uncertainty to ripple through from the "bad paper" to the "good paper" and then into the stock market.

Jeffolie,

I followed your link and indeed it said federal funds traded as low as 1% interest rate. Can this be for real, or is there a typo in the article?

Per an older post I made, how does this NOT constitute a big cut in interest rate, and without giving official notice?

By the way, did anyone notice that (a subsidiary of) Countrywide Financial Corporation (NYSE:CFC) is on the list of the Fed's Primary Dealers?

I can only imagine how "fun" this is going to get tomorrow when the stock market opens...

skibum

Tech companies are notorious for *not* using corporate credit, especially software tech. Certainly new ventures are mostly equity-funded, which as SP says could dry up during a decent recession (though that will lag because VC cycles lag due to overhang), but mature software companies are banks. If anything, most carry far too much excess cash on their balance sheets (from a shareholder perspective).

I do agree we'll see the Web 2.0 me-too social networking mini-bubble pop. But I am not yet convinced that we're set to see the trend into infrastructure, energy, and clean-tech dry up any time soon regardless of recession -- unless it's a terrible, long recession. Ironically, the implosion of so many hedge funds will have the effect of forcing a lot of money back into traditional VC funds.

Per an older post I made, how does this NOT constitute a big cut in interest rate, and without giving official notice?

justme,
As I understand it, this temporary 1% Fed funds rate is unusual, but it doesn't constitute an "official" rate cut. The overnight Fed funds rate set by the Fed at it's periodic meeting is not a cold hard trading rate. The actual trading rate is in part set by supply/demand by the banks and institutions that participate in overnight lending. The target Fed rate determines how the Fed injects or removes cash to drive the actual trading rate towards its goal rate, currently at 5.25%.

Tech companies are notorious for *not* using corporate credit, especially software tech.

Randy H,
Of course I don't doubt that you are correct on this statement, but I don't think there needs to be a direct cause-and-effect of tech companies holding lots of credit running into trouble due to credit squeezing and related phenomena. With a truly global credit squeeze clearly underway, eventually, tech will suffer as worldwide, industries across the board batten down the hatches and cut back on spending, which of course includes tech upgrades and related expenses. On top of that, spending on personal electronics - cell phones, computers, anything with a chip in it (most things these days) will be curtailed as the HELOC gravy train derails.

Astrid,

Republicans, the masters of the "wedge issues". My god, I hope borrower or lender bailout does not turn into the holy cow mother of all wedge issues.

"Just a couple of days ago I received a pretty well written letter in response to our letter writing campaign from Barbara Boxer. "

When they were my Senators, I wrote several letters to both Boxer and DiFi. I always received at least a courtesy reply from Boxer, but never received anything DiFi.

"I predict the first permit for a nuclear electrical generation plant in thirty years within U.S. borders will be granted within a year."

There's a company aggressively seeking a permit to build a commercial reactor complex here in Owyhee County (ID). It will probably be the first to be granted since the NIMBYs aren't a factor here. Both the Dems and GOP favor nuclear plants to replace dams so the salmon can thrive (Idaho green politics). The Idaho Nat. Labs here already has about 600 reactors so most people don't get all upset about them.

I'm not sure if I want to make any predictions since I've been wrong too often in the past. I quit my job in June 2005 to clean up my SJ house for sale since I thought the market would tank any day. Looks like I was about 18 months early on that one. Now I would say the bottom of the market will be hit more than the top of the market. But who knows...the "move up" guys have to unload their current houses too. Maybe a dead bottom will mean a nearly-deal upper market.

Never underestimate the power of outsourcing offshore. I became a patent attorney in the early 1990's as a "outsource-proof" career change. Nowadays big companies are outsourcing much of the work to India and only keeping US counsel for proof-reading and filing in the USPTO (need a US reg. number to be allowed to file a case).

I predict the first permit for a nuclear electrical generation plant in thirty years within U.S. borders will be granted within a year.

Being that I'm working in the energy sector right now, and I just visited a large customer back East, I can guarantee you're right. In fact, you're wrong only in that there will be probably 15-25 or more plants started within the next 15 years. This one mega utility alone is planning for capacity of 2 per year.

There is a very serious energy problem looming which is compounded by emissions issues. Nuclear is a near term solution, and it is being pursued aggressively. Bear in mind that the US Government changed the rules for proposing new plants by requiring a huge up front-fee, but then protecting the investors from any regulatory delays by making them whole on their project TVM.

I became a patent attorney in the early 1990’s as a “outsource-proof” career change.

Not only do we not use Indian patent attorneys, but we only use local ones. They are extremely expensive, even more so for a young company, yet these are dollars well spent. I would not trust our barriers strategy to slop Indian processing centers.

Stupid question time...how do I flag italics on this board? Is it [i]text[/i] ?

Dennis: use <I> and </I>.

My prediction is that there’s gonna be a backlash against the federal government when the analog TV signals go dead next year.
Do you think the politicians would be crazy enough to do this in an election year. We actually have a bit more time before the cutoff -- Feb 17, 2009. Oh, and the backlash will be against the cable companies and their crowded, expensive pipes (where the HDTV channels get compressed more than on the free, over the air broadcasts). At any rate, you can probably figure out that my household does not have a cable bill, yet has more channels than I could ever watch (5 PBS channels for KQED in the BA alone!) Thats right, TV antennas will make a comeback and of course, all this will be exacerbated by FBers who have to unplug their cable boxes and will discover free, wireless digital TV on their soon to be repoed high def plasma screens :-)

EBGuy,

Yeah, the local PBS affiliate here has up to 5 simulcast DTV channels www.idahoptv.org/schedules/digital.cfm . And the transmitter is up at the Bogus Basin ski resort about 6,000 ft. above the plain. So we all have direct point-of-view direction to the transmitter from our cheap $30 antennas bought at Home Despot that we put up in the garage rafters. Free is good. Why pay cable?

Guide for prediction:

1) Calculate the maximum dollars exchanged.
2) Figure the absurdity of the political claim.
3) Make certain prediction.

Like this:

A second nuclear reactor at the Watts Bar Nuclear Plant Approved.

hmm, who's bearish now:

Experts were wrong on subprime loans

I can sell you some uranium if you like. That might be one reason why the Federal govt just claimed land rights back from the Aboriginals in the Northern Territory where most of the uranium is, in the interests of halting 'pedophilia and child abuse' in the NT, although the problems have been known about for years. Coincidence? It was a remarkable act of timing.

Astrid, I protest!

The sushi-loving/apolitical/home garden/quick irony element is not so generously supplied here that a reduced presence would not be very sadly noticed!

DS,

how is the water crisis going down under? Any long-term fixes?

I continue to be very bullish on Australia, the country with the largest known uranium reserve in the world. Apart from BHP, are there more focused uranium explorers in Oz just like CCJ in Canada?

Randy,

I have a question regarding securities held at brokerages.

What are the risks and possible scenarios in which one can lose his money (not through investment) should the brokerage goes under? I understand that SPIC insures up to $500K worth per account, what should one do if let's say, one has more than that at a certain brokerage? Thanks.

@ OO

I am excited for Australia as well. I even filled out a visa form 8 months ago for grins. According to them, I am not a native English speaking person because I am a US citizen. It does not matter though, I scored high on their point system.

I work in the nuke industry and I hope they do start building nukes. I don't care if I have to immigrate to Australia to get on the nuclear renaissance. I would like to stay in the US. I just wonder if staying with a country (USA) that I consider on the slide towards bankrupcy is better than moving away to the southern hemisphere from everything and everyone that I know.

OO Says:
how is the water crisis going down under? Any long-term fixes?

There were 3 weeks of solid rain in winter in NSW, which brought up dam levels somewhat, but they're still going to go ahead with a $2bn desal plant, unpopular tho it is in some quarters. It's going to make water bills expensive for some time to come. They say they have gone to far to reverse the decision now. The Murray-Darling system is in crisis still, and it's become a political football with the Feds grandstanding over the states in an election year -- Howard has decided to run with a 3-legged horse after Victoria pulled out of a cross-border approach to managing the river system...

I continue to be very bullish on Australia, the country with the largest known uranium reserve in the world. Apart from BHP, are there more focused uranium explorers in Oz just like CCJ in Canada?

There has been speculation on uranium futures for some time since GBW started talking about renewing US nuclear power stations, once things started getting a bit hard in the Middle East. For some reason, it didn't occur to me to invest in uranium stocks given all that mucky unpleasant background. I don't know who has mining rights to uranium in Oz particularly, a lot of it is in the NT apparently, and otherwise spread around. I don't really track uranium as an investable resource, as 1) it's a bit scary as a substance, 2) it's expensive to build the power stations, 3) uranium itself will run out very quickly if uptake is high, say within 40 years, 4) I just don't chase after commodities returns in markets -- I can only hope my superannuation scheme has some money invested in it if it's an earner...

thenuttyneutron Says:
I even filled out a visa form 8 months ago for grins. According to them, I am not a native English speaking person because I am a US citizen.

hmm, it is debatable sometimes -- they might make you take a TESOL course or two, and perhaps some accent correction classes ;)

DS,

I am not sure I can get my accent fixed. I lived in Texas all my life until I moved to Ohio in August 2005. These people in Ohio have some strange pronunciations of common English words. I don't think I will ever get rid of my Texas accent. I can however yell many stereotype Australian phrases that I learned on TV :)

Also don't worry about the Uranium Supply. If you let the nuclear engineers such as myself do our job, we will build reactors that make more fuel than they burn. We could extend the nuclear fuel supply out for thousands of years. When we solve the problems of fusion, we will have more fuel than we will ever be able to burn. I have a hunch that the Inertial-electrostatic confinement work by Dr. Bussard will become a commercial reality one day.

thenuttyneutron

Being a native speaker of Ohiolisch, I'd have to say my favorite translation is:

Standard Proper English: Have you eaten?
Casual Usage: Did you eat?
Ohiolisch: Jeet?

Standard Proper English: No I have not; have you?
Casual Usage: No, did you?
Ohiolisch: Naw...joo?

And remember, soda is "pop", greasy is "greezzee", and it's pronounced "newk-you-lerrr".

What is with this "dollar swap" business going on between ECB and US/Fed?

Quote:

http://www.marketwatch.com/news/story/ecb-reportedly-weighing-swap-fed/story.aspx?guid=%7B979B396A%2D3738%2D4EEC%2D8376%2D3630883C60A9%7D

The ECB, which last week pumped more than 150 billion euros into the European banking system, is reportedly seeking out dollars because of difficulties that European banks are having with funds invested in asset-backed securities, according to several British media reports.

Unquote

So now we are lending/selling them more bad dollars to shore up their bad holdings of ASB/MSB? This looks like genius on our part -- or is it?

ASB/MSB should be ABS/MBS

Standard Proper English: Have you eaten?
Casual Usage: Did you eat?
Ohiolisch: Jeet?

Peter P English: What did you eat?

My prediction is that there will still be a lot of new FBs out there who are buying properties to flip them, even though the easy "no down, no income verification" loans have disappeared. I went to a wedding wwwwaaaaayyy up north from SF in Rohnert Park this past weekend and some fools were still talking about wanting to get into flipping in Truckee citing that "home prices have appreciated from $150k to $600k in 4 years!" These folks will lose whatever savings they had and will cry to mommy and daddy (or whoever will listen) when they go belly up.

For those of you who aren't from CA, Truckee is a third rate town, which is essentially where people stay when they can't afford to stay in Reno or along the lake in North Lake Tahoe. Home prices there have appreciated since so many bay area folks bought second homes up there. Right now, there are hundreds of 1-2 million $ homes up for sale there and hundreds in the $500k-1 mil range. How is one supposed to flip houses with that much inventory in one city? Some people are still smoking the housing rock pipe... these folks would never believe "The steepest part of the downward curve in home prices is now just around the corner as the inflection point has now clearly just passed."

Peter P:
IIRC eating raw fish is illegal in Ohio.

I don't know about the future, but in the present someone I know is about to lose their house in San Mateo. They are behind on property taxes, etc. The realtor told them they will not be able to get what they paid for the house (if it sells). They are also behind on their second home up north (somewhere outside Sacramento). I'm not sure when they bought the house in SM.

Professional squatters. Pay me to live in your house.

Bahstan food discussion:

D'you jus faht?

Who ah you, my fuggin' grandmothah?

Jus smeels like something crawled up your azz and died.

Naw, it was that nasty grinder I ate from the spa.

Wicked, any left in the 'fridge?