Category Archive

There is nowhere to hide. We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.

Nobody’s in favor of long-term ownership of the U.S. banking system by the government, but if you don’t do it this way you end up like Japan where you kept alive for decade zombie banks that were never restructured. That’s going to be much worse. It’s better to clean it up, nationalize it and sell it to the private sector.

—Roubini

• Case Shiller passed 25% declines from the peak in the broader 20 region index.
• Median sales price of existing homes accelerated downward 13.6% and 15.3% in November and December, year over year, respectively. National Association of Realtors
• Housing starts are down 75% from their peak in January 2006.
• New home sales in the US fell to a 17-year low of 407,000 in November, according to the Commerce Department on Dec. 23. December new-home sales will be reported on 29th.
• US foreclosure filings grew 81% in 2008 over 2007, pushing more than 2.3m properties into default, auction, or seizure. (RealtyTrac)

The freefall in residential real estate continued through November. Overall, more than half of the metro areas had record annual declines.

—David Blitzer, chairman of the index committee at S&P.

…nonetheless…

It’s not going to be a terrible year for the housing market, believe it or not. I think these stabilizing forces are there, and over the next year you’ll see the housing market come back into equilibrium.

—Karl Case

Six Errors on the Path to the Financial Crisis

Wild Derivatives — Treasury and Fed refuse former Chairwoman of the CFTC, Brooksley Born’s, request to regulate derivatives.

Sky-High Leverage — SEC allows for the sudden and dramatic increase in leverage in 2004, moving the average from 12:1 to 33:1.

Subprime Surge — Between 2004 and 2007, subprime lending “grew from a small corner of the mortgage market into a large, dangerous one.” Two reasons are attributed to this transformation:

• Bank regulators, despite warnings from those like Ed Gramlich, were “asleep at the switch.”
• Many subprime mortgages were originated outside of the banking system and “beyond the reach of any federal regulator. That regulatory hole needs to be plugged.”

Fiddling on Foreclosures — “The government’s continuing failure to do anything large and serious to limit foreclosures is tragic…Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles.”

Letting Lehman Go — “perhaps they wanted to make an offering to the moral-hazard gods…After Lehman went over the cliff, no financial institution seemed safe.”

TARP’s Detour — “decisions of [Paulson] about using the TARP’s first $350 billion were an inconsistent mess.”

—Blinder in the NYT

The right and wrong way to bail out the banking sector

The hard choice facing the Obama administration is between partially nationalising the banks, or leaving them in private hands but nationalising their toxic assets. Choosing the first course would inflict great pain on a broad segment of the population – not only on bank shareholders but also on the beneficiaries of pension funds. However, it would clear the air and restart the economy.

The latter course would avoid recognising and coming to terms with the painful economic realities, but it would put the banking system into the same quandary that proved the undoing of the government sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac.

—George Soros in the FT

“It’s good to smash” – China and the protest problem

Mass incidents: in 1994 — 10k; in 2005 — 87k; today, no longer publicized

Between 1997 and 2002, 35 million urban workers were laid off between, but no major unrest resulted.

…but now we have mobile phones

“if a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilisation of both paramilitary armed police and army units, and possibly substantial bloodshed”

—Victor Shih, assistant professor of political science at Northwestern University in Chicago

…and upcoming anniversaries: the 20th of the Tiananmen protests and the 60th of the People’s Republic

The pound sterling is going to be under pressure. The U.K. hasn’t got much to sell to the world anymore.

—Jim Rogers, chairman of Singapore-based Rogers Holdings

Now is the time to diversify our foreign reserves assets. With billions of new issuance in the near future, cashing in would become riskier.

—Yu Yongding in the China Securities Daily

Home prices down 10% in 4Q08

Average price fell to $669,000 from a year earlier, with the steepest drop in 1-3 family homes, declining 13% to $548k

Apartment prices citywide fell 4% to an average $796,000.

…but

The average Manhattan apartment sale price rose 6% to $1.37mm, which could be attributed to substantial sales at 101 Warren St. Volume in general was down 35%.

…And

The average sale price for a Manhattan co-op increased to $1.09mm, with prices in Grammercy/Kips Bay rising 34% to $1.92. Upper East Side co-op prices rose 61% to $1.87mm, boosted by $20mm+ sales

Real Estate Board of New York

meanwhile…

Housing starts fall 16% in December to an annual rate of 550k – the lowest since 1959

Homebuilders have no choice. The market is bloated with excess supply and demand is weak. The pace of housing starts will remain depressed until 2011.

—Ryan Sweet, an economist at Moody’s Economy.com

…and

Initial Jobless Claims matched a 26 year high at 589k

Hedge-fund assets declined 48% in 2008 on losses and redemptions

• Assets – December 2007: $1.92 trillion
• Assets – December 2008: $998.4 billion at the end of December
  • at the lowest level since July 2004, $976.7 billion
  • December Redemptions: $148.8 billion, a record

—TrimTabs Investment Research and BarclayHedge.

The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009. In terms of our sector, we expect consumer loans and credit cards to continue to get worse.

When we look back at industry excesses in areas such as highly leveraged lending and securitisation, it is clear that some of these markets will never come back. In the next few years, the industry will go back to basics: serving individual and corporate customers as best as we can.

—Jamie Dimon in an FT interview and reflecting on profits of 1/3 the size of 2007 ($5b vs $15b)

Frontline Ltd., the world’s biggest owner of supertankers, yesterday said about 80 million barrels of crude oil are being stored in tankers, the most in 20 years.

–Bloomberg