patrick.net

Countdown for the second welfare check begins...today!

I just heard the sleazy CEO of Hovnanian enterprises plead the case for a taxpayer bailout of his company. He wants a 2% subsidy of mortgage rates plus more tax incentives for buyers.

I believe he'll get it. I also believe that it will only be the first of many more incentives to come.

By the time this is all over, we'll be seeing "buy now and pay nothing for the next two years" sort of deals in housing.

If we time that correctly, we might be able to buy near the low (still far away from now) and pay back with heavily depreciated dollars (inflation) following the deflation period.

Hell, along with the right starting interest rate we might even be in a situation of negative interest where they are paying us to take a loan.

Gotta love it.

Duke Says:

> Just thinking about the order of things
> 1. Credit Card defaults

This has already started…

> 2. Commercial RE

This has also started and will turn in to a flood in the next couple years with the combination of IO periods ending as vacancy increasing as businesses cut back on space.

> no CEO is worth 1,000x his employees

The CEOs that are worth 1,000x their employees are the ones that can make deals and bring in big profits. I don’t know if the Wells Fargo CEO was the one that did the deal, but the tax break they just got before they bought Wachovia will be worth Billions…

P.S. Good to have Randy H. back...

The problem with the inflation-debt-arbitrage game is you have no idea how long or how deep the deflation will be. I'm certain that plenty of folks thought they'd run that strategy in Japan too. But that pesky deflation just kept on a comin'.

FAB,
The CEO certainly did not do this in a vacuum. Look, if that 1 CEO makes $100m how many Ford cars can/will he buy? If that profit is paid to Wells workers and Wells shareholders I think we will see Ford much better off.
Don't get me wrong. If you have a private company and you want to pay yourself $100 million, go right ahead.
If you are the CEO of a publicly traded company you owe it to your shareholders to 1) keep expenses down by keeping turnover down (so pay your people more) and 2) pay your shareholders directly through dividends.

The truth is, I find it tiring to keep saying we should not lend money to the non-credit-worthy. What makes people not credit worthy? Many are simply not paid a wage that will support people buying the very products and services their emplyers produce. And THAT at a time where CEO pay is at an all-time high - both in absolute terms and expressed as a percentage of profit or as a multiple of the average person's salary.

Look, we don't need a tax system to create a middle class, we need a system in which cozy boards and cozy CEOs don't take all of the profits for themselves. It is simply not true that Anthony Mozilla and only Anthony Mozilla could have taken Countrywide from $1 per share to $100 (an back down again). CEOs are at least as much of a commodity as their workers. Doing nothing but swinging big dels for tax breaks hardly justfies paychecks like we see now.

Hell, along with the right starting interest rate we might even be in a situation of negative interest where they are paying us to take a loan.

Has there ever been a negative discount rate? That is, where the sum of the monthly payments is less than the principle borrowed?

If so, that would indicate serious deflation, where the borrower would be paying back the loan at a fixed monthly payment while his salary/returns steadily decrease. In this case, savings would be the more desirable vehicle to acquire resources, since prices fall as your savings build. The pool of borrowers may thus be limited to the short sighted, ignorant or irresponsible. Classic moral hazard.

The problem with the inflation-debt-arbitrage game is you have no idea how long or how deep the deflation will be.

I hope this idea is accepted widely enough to put a damper on speculation.

But what about investors? One could purchase a rental property when the home prices have fallen enough for typical rents to approximate debt servce cost or cash opportunity costs, plus a factor for maint/insurance/taxes. If deflation continues, taxes, maint costs, and interest rates (affects opportunity or loan/refinance costs) will go down. The risk would be that the home price would fall far enough during the rental years to outpace rents collected (you put up with toilets and tenants for nothing), or if you financed, that rents would fall too low to cover the mortgage aspect.

I like to think our underlying democracy system is still intact

Let's see on Nov 4th if the politicians who voted for the bail out end up being defeated for that wanton disregard of constituent wishes.

or if you financed, that rents would fall too low to cover the mortgage aspect

That's the key. If you buy with cash and have a long horizon, and get within a reasonable variance from "the bottom", then your logic holds up. If you have debt -- especially amortizing, fixed interest debt -- then you forfeit compounding opportunity costs. In other words, you would have been better off saving cash even if your rent is higher than the cost to finance a purchase, if you're an owner occupier. If you're an investor, then you're simply failing to maximize your net present value. For investors, they would be better off hoarding cash until property prices have started to rise again, and deflation has leveled off, even though they will pay higher entry prices they'll have a greater NPV.

Duke is right.

I think CEOs are, or should be, a commodity. Many if not most of them only have ladder-climbing and self-enrichment skills. They are like a tax on the company profits.

I watched Jeff Immelt of GE on PBS yesterday on a Charlie Rose show about leadership.

One of his four points of leadership was to get up in the morning and say "hello handsome" to himself . Then he would go on and "reinvent" himself for the day.

Here is what I think it means when Jeff Immelt reinvents himself:

1. forget every mistake he made yesterday
2. do not learn anything from it
3. always rewrite history so that someone else gets the blame.

Did I forget something?

If you buy with cash and have a long horizon, and get within a reasonable variance from “the bottom”, then your logic holds up.

This is my plan. However, judging that "reasonable variance" is the rub. I could see a house that I know I can rent for $1,000 hit the market for $175k. This looks like a near bottom to me, so I buy it. If the house continues to depreciate over the next two years until hit hits $150k, I lose. I did not collect enough rent to make up the difference, plus I lost the 1% or so I could have recieved in bank interest. I also had the trouble of landlording and paying taxes, insurance, and maint.

You point about waiting for an uptick has merit.

The big LEH CDS settlement event of today apparently has not closed yet.

http://www.marketwatch.com/News/Story/swaps-settlement-watched-signs-credit-market/story.aspx?guid=%7B70FEEA73%2DAAF6%2D4555%2DA10E%2DEE434BFC983E%7D

What is the real motivation for Argentina to take over the private pension funds? The story does not pass the smell test, or maybe I should, so far there is no real story out there.

I think lunarpark is asleep at the wheel. Here's the latest from DataQuick.
Bay Area home sales soared last month above the record-low levels of a year ago, marking the largest gain in over six years. The median sale price did the opposite, diving to $400,000 - 40 percent below its summer 2007 peak - as more sales shifted to lower-cost inland markets laden with foreclosures.

EBGuy, I found this statement in that article interesting...

"For the inland markets," he continued, "September's relatively strong sales provide more evidence that a recovery got well under way this summer. Now it's just a question of whether it will stay on track and provide stable prices and fading foreclosures in 2009, or will it get derailed by an economic crisis."

I'm pretty sure it already got derailed, but it will be interesting to see how it plays out. We are riding a very fine line right now. On one side, I could see a mild recession, whereby the great reckoning is held off for another day (5-10 years). Also, i could see us spiraling into disaster any day.

The housing market itself is fairly close to getting back to an equilibrium (5-10%), but only with ALL ELSE BEING EQUAL. But as we know, everything else is not equal. The housing debacle has opened our eyes to the shortcomings of our monetary and financial systems, both of which are dangerously near their failure point.

I wonder what the real unemployment rate would be in a truly healthy capitalist society.

So many companies that are employing people are on a credit lifeline. Either through venture capital, debt, or even now our government.

How much of that is due to the credit bubble? If you immediately bring the debt system back to reality, what is a reasonable unemployment rate? 10%? 15%?

As long as all these bailout programs don't work, de-flation is the order of the day and prices will keep going down and you really have to worry about de-flation with a "d".

But, the Federal Reserve and world central banks have engaged in activity, even up to today's money market fund action, that can best be described as hyper-inflationary. They are inflating their balance sheets and they are inflating the world money supply to a degree no one ever thought we would see.

The fear is that "when the chain catches the sprocket" and the credit starts flowing and everything starts moving again, then we flip into a hyper-inflationary environment because of all the money that's been put into the system.

Money is being destroyed at a rate many times greater than all the worlds' central banks can create it. Hundreds of trillions in leverage are disappearing. That is why there is such a growing downdraft of deflation. And it is why the liquidity-trap is real. The Fed can keep on printing all they want, it just mainly goes into this or that bank's balance sheet to lower their leverage a bit more.

The actual money supply isn't growing all that much, netted out. That's what keeps Heli Ben up at night. For all his truly well studied Great Depression knowledge, it could well be that deflation is just the inevitable outcome of the perversion of capitalism by oligarchs.

---

The term "toxic asset" has been in use for at least 12-15 years. Probably for longer. It comes from the name for the lowest, junk-rated debt tranche. I believe that itself came out of the insurance industry, which I know was doing tranching of debt in the early 1980s, probably earlier.

Randy,

I don't think the Fed has exhausted their ways of printing yet.

Japan is different from us, because

1) Japan didn't get a coordinated rate cut or printing support from around the world, so there is leakage, lots of Yen are borrowed from the government to fund carry trade in other countries, therefore, the supply of Yen got sucked into a blackhold.

That is also why when everyone else is in a deflation mode, Japan is having its highest inflation in years, because the Yen carry trade unwinding is bringing home all the Yen!

2) Yen is not the world's reserve currency, USD is. They are a much smaller country with extremely limited resources, they could not print recklessly to jeopardize trade. They had to maintain some sort of value of Yen so that they could obtain the much needed resources. Not the case with the US, except for oil, which we could obtain through military means, we can afford to be far more reckless in printing.

3) We have not even started the Japanese style printing yet. Japan's biggest printing was building roads and bridges to nowhere. We have yet to get to that point when grand, multi-year infrastructure plans are funded by the government creating employment. That is the most efficient way of distributing printed money.

I think there is a time lag between the printed money and the inflation. Give it 6-12 months, inflation will come roaring back, particularly that we are getting coordinated printing support from all CBs.

Yahoo to fire at least 1,500 workers after third-quarter profit plunges 64 percent

SAN FRANCISCO (AP) -- Yahoo Inc. will fire at least 1,500 workers to cope with a crumbling economy that dented its third-quarter profit and turned up the heat on the slumping Internet company's management as investors stew over a missed opportunity to sell to Microsoft Corp. for $47.5 billion.

The purge outlined Tuesday represents a 10 percent reduction in Yahoo's payroll of about 15,000 employees. It's the second time in nine months that Yahoo has resorted to mass layoffs in what so far has been an ineffectual effort to rebound from a financial funk that has left its stock price near a 5 1/2-year low.

I worked for Yahoo and could not sustain politics and resigned after five months. I worked in Panama project ....

PermaRenter,

What was the Panama project. Building a proverbial canal into search advertising revenue?

Hanky Pank Paulson was on Charlie Rose (PBS) tonight. It is amazing how much less smart he sounds when he has to hold an actual conversation.

Here's one of the statements that Paulson made (lightly paraphrased from memory):

He did not make the decision to let Lehman Brothers go bankrupt, because there was no buyer and hence no decision to make, and the Fed did not have the authority to do anything.

Does he believe anyone will fall for that one? Fed could bail out AIG but not LEH?

>> What was the Panama project.

http://yhoo.client.shareholder.com/press/ReleaseDetail.cfm?ReleaseID=226887

SUNNYVALE, Calif., Jan 23, 2007 (BUSINESS WIRE) -- Yahoo! Inc. (Nasdaq: YHOO), a leading global Internet brand and one of the most trafficked Internet destinations worldwide, today announced that it will launch its new search marketing ranking model in the U.S. on Monday, February 5. With the new ranking model, all Yahoo! search marketing ads in the U.S. will be ranked by quality in addition to keyword bid price. As a result, Yahoo! will be able to provide a more relevant search experience to users, more valuable customer leads to advertisers, and additional opportunities to its distribution partners.

"Yahoo! is very excited to introduce our new, more quality-focused ranking model because it has the power to significantly enhance the experience we deliver to our users and unlock the full potential of Yahoo!'s search marketing network," said Terry Semel, chief executive officer, Yahoo! Inc. "With this important piece in place our new search marketing system will allow Yahoo! to more effectively connect people with the businesses, products, services and information they are passionate about."

PermaRenter Says:
Yahoo to fire at least 1,500 workers after third-quarter profit plunges 64 percent

The "real number" that I heard was closer to 3500 - not sure whether the announcement of 1500 is the first of several cuts, or if there is a different reason for the diff, or if the 3500 rumor was false.

It looks like most of the cuts so far are in the overhead roles (product marketing, administrative, etc.) and fewer in the core engineering talent. Although I have recently got a significant spike in linked-in messages from Yahoo engineers looking to jump ship. I cannot imagine why any talented technical staff would stick around at this point.

Yes.

Where have all the white swans gone?

PermaRenter,

I'll take that as a "yes" :-)

Derivitives are begining to blow up.
That slow motion train wreck we had in the markets until they went to heck. . . well the derivitve market is going that way.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5x0jMKZf4yc&refer=home

Uhg.

Now this is very "interesting"": Banks have been holding back on realizing losses, EXCEPT when they are about to be taken over, in which case they realize as much as possible.

Case in point, Wachovia just reported about 24B in losses today, in time for the takeover by Wells Fargo.

http://tinyurl.com/597gw8

Not that anyone is surprised, but clearly people are wondering what is hiding in the balance sheets of the supposedly "good" banks.

From Duke's Link:

The banks that structured the securities and investors both failed to do ``fundamental credit analysis,'' said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. ``They were using correlation models, they were using spread models, but they weren't doing analysis on the underlying corporations.''

'Cause, dontcha know, everything always goes UP so why do we need to worry about Underlying Strength?

I think the thing with Wachovie was this: the IRS just changed the tax code and how it allows for losses. What wells is doing is dragging losses forward to realize tax savings. It pays to mark-down now. So, models were tweaked. . .
If itturns out to not be as bad, the IRS will recapture the tax savings in the future.

Does anyon believe it won't be as bad?

Duke, I had not seen that. Do you have a reference on the iRS change?

I get the feeling we're close to the next inning. I think everyone is starting to realize that all of our government's activity is only helping banks, and no one else.

In theory, they are helping the banks lend more money. But we all know no one wants to borrow right now except those who shouldn't be. And the banks won't lend to them anyways. So in summary the biggest free market intervention in the history of our country is simply being used by banks to deleverage. Wonderful!

Jobs are being lost at an alarming rate as companies come to grips with what will be the worst Christmas season in many years. Any products even slightly frilly (like everything Circuit City carries for example) will sit on the shelves untouched. Look for any retailer that focuses on such products to get slammed in Q4.

Does the government really think people are going to keep buying speaker sets for their ipods when they are desperately trying to figure out how their going to afford their house for the next 2 months? I think we'll cross the double digit unemployment before the end of Q1 09, as companies on debt-based lifelines burn through their remaining cash and go belly up.

Meanwhile the market is about to retest it's low point, less than 2 weeks after it hit it the first time. That is rather soon from a technical perspective. There is a good chance it won't hold as it's getting harder and harder for the powers that be to trick the people into thinking help is on the way. I get the feeling we might be retesting the 2002 lows before the end of the year, and maybe even in the next month.

Remarkable times.

Now, why on earth we are still honoring CDS with no basis in economic reality is beyond me. Annul these stupid things! THAT will give people the confidence to invest.

I think the issue with CDS' is that there are a million wannabe' Nassim Taleb's out there trying to replicate his performance during the S&L fiasco.

I say junk the whole market. If hedge funds want to make money, let them invest in US companies, instead of betting they go broke.

I think we’ll cross the double digit unemployment before the end of Q1 09, as companies on debt-based lifelines burn through their remaining cash and go belly up.

That may be true is wages do not decline. China is already closing literally thousands of factories (ABC News) as demand fron the US dries up. Part of the demand loss is more US local manufacture, such as furniture making returning to Carolina from China. As shipping costs increase and US wages fall, we may see the "insource" trend continue. If so, US unemployment will not be so high, but the the jobs created will pay less. But with decreased housing costs, those lower wages may afford the same market basket as the previous debt-inflated wages.

I say junk the whole market. If hedge funds want to make money, let them invest in US companies, instead of betting they go broke.

I am frustrated at this kind of attitude. It is precisely why we are here in the first place.

Mal-investments must be liquidated. Why favor investment in a time of purge?

Annul these stupid things! THAT will give people the confidence to invest.

When policy makers start annulling private contracts based on their self-righteous judgment, people will LOSE all confidence to invest.

Do you admire Hugo Chavez?

All-right, lets take Peter' argumnet.
"Hi, I am in insurance comany. Pay me $1k a year and I will insure your $300k home."
However, the insurance company sets aside NO money to actually pay people. What it does is plays at the race track losing everything as fast as it comes in. No one cares since there are no fires for 8 years. Then, we get a big fire. It burns hundreds of thousands of homes.
And the inurance company laughs and simply goes out of business.

Look, regulation is there to ensre that insurance companies actually make real provisions for real risk based on real analaysis.

I keep wondering who would willingly be a countryparty to hedging debt bets? I mean, we ALL see massive debt loses coming. So who? Either their cost shold shoot way up (and they are, but still not enough) or the company is already bankrupt. It is willing to keep taking on bad CDS deals in the hope the new premiums will help it pay off its old bad bets and that eventually they will simply get lucky and stop having to pay out. Its like betting bigger andbigger at Vegas (until you go bankrupt).
OR the get the US governement to back them and then take on ay CDS deal out there, cuz' why not? Its just Unlce big bucks that cover pay outs.

Illegal contracts are anulled ALL THE TIME. IT IS A PART OF LAW! We frequently only lear later how some product is used in an unintended manner which has devestating consequences. CDS, since they are NOT tied to an interest in the actual Debt, and Since the Hedge can be many many times larger than the debt itself mke no econmic sense.

What we have is heigtened risk and heghtened volatility. The lesson lerned by these people is that the governement wll step in using its systemic risk clause. Heck, it is part of their business model. Dick Fuld admitted as much. "Why didn't I get MY bailout?"

If we had clear access to the worlds positions on CDS you would see the world - um sweat. Becuase you cannot even puish he bad guys. If you drive their stock to zero for their stupid positions, you suddenly discover that the debt of the stupid guys is backed by other stupid guys. And so on. For more than 10x world GDP. Since the bad cannot be punished, becasue everyone is bad, you must simply annull. The only other options is to asymetrically reward people in more ordinal positions.
For example, when we get runs on money market funds, at some threshold they HAVE to shut down a fund. The thinking is that the first people out the door get all of their money, and each person in turn less and less until evetually the last person (at the leverage limit) gets alomost nothing. To avoid self-fulfilling panicks we wite into law how to shudder funds. Just as we right into la how we annull unenforcable contracts.

I admire your purist views, Peter, but they are remarkably shallow in the context of how the world actaully works. The abuses of 'pure market forces' are amazing - and we have already seen the abuses.

Your snotty question about Chavez is beneath you and I will not respond in kind.